Note 13 - Noncontrolling Interests

3 Months Ended

Mar. 31, 2022

Notes to Financial Statements

Noncontrolling Interest Disclosure [Text Block]

13. Noncontrolling Interests

Redeemable Noncontrolling Interests in the OP

Interests in the OP held by limited partners are represented by OP Units. As of March 31, 2022, the Company holds the majority economic interests in the OP. Net income is allocated to holders of OP Units based upon net income attributable to common stockholders and the weighted-average number of OP Units outstanding to total common shares plus OP Units outstanding during the period. Capital contributions, distributions and profits and losses are allocated to OP Units in accordance with the terms of the partnership agreement of the OP. Each time the OP distributes cash to the Company, limited partners of the OP receive their pro-rata share of the distribution. Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP.

Pursuant to the second amended and restated the partnership agreement of the OP (the “OP LPA”), limited partners holding OP Units have the right to cause the OP to redeem their units at a redemption price equal to and in the form of the Cash Amount (as defined in the OP LPA), provided that such OP Units have been outstanding for at least one year. The Company may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Shares Amount (generally one share of common stock of the Company for each OP Unit, subject to adjustment) as defined in the OP LPA. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption right to the extent the issuance of the Company’s common stock to the redeeming limited partner would (1) be prohibited, as determined in the Company’s sole discretion, under the Company’s charter or (2) cause the acquisition of common stock by such redeeming limited partner to be “integrated” with any other distribution of the Company’s common stock for purposes of complying with the Securities Act. Accordingly, the Company records the OP Units held by noncontrolling limited partners outside of permanent equity and reports the OP Units at the greater of their carrying value or their redemption value using the Company’s stock price at each balance sheet date.

The Cash Amount is defined in the partnership agreement of the OP as the greater of the most recent NAV of the Company as determined by our Board and the volume-weighted average price of the Company’s common stock, which because the Company’s common stock is listed on the New York Stock Exchange (the “NYSE”) will be calculated for the ten consecutive trading days (the “Ten Day VWAP”) immediately preceding the date on which the general partner of the OP receives a notice of redemption from the limited partner, or the first business day thereafter (the “Valuation Date”).  The Ten Day VWAP calculated based on a Valuation Date of  March 31, 2022 was $22.46, and there were 7,138,382 OP Units outstanding other than those held by the Company. Assuming that (1) the Ten Day VWAP exceeded the NAV, (2) all OP unitholders exercised their right to cause the OP to redeem all of their OP Units with a Valuation Date of March 31, 2022 and (3) the Company then elected to purchase all of the OP Units by paying the Cash Amount, the Company would have paid $160.3 million in cash consideration to redeem the OP Units.

On July 30, 2020, NREF OP IV, L.P. (“OP IV”), one of the Subsidiary OPs, entered into subscription agreements with certain entities affiliated with the Manager (the “Manager Affiliates”), which were then-current majority owners of OP IV, for 359,000 SubOP Units in OP IV for total consideration of approximately $6.6 million. On August 4, 2020, OP IV entered into additional subscription agreements with the Manager Affiliates for 267,320 SubOP Units in OP IV for total consideration of approximately $4.9 million. The total number of SubOP Units issued was calculated by dividing the total consideration by the combined book value of the Company’s common stock and the SubOP Units, on a per share or unit basis, as of June 30, 2020, or $18.33 per SubOP Unit.

On September 30, 2020, the unitholders (other than the OP) of OP IV exercised their redemption right for 100% of their units outstanding. Following direction and approval of the Board and the general partner of OP IV, the OP purchased the tendered OP IV units in exchange for an equal number of OP Units. After the transaction, OP IV is wholly owned by the OP. 

On September 8, 2021, the general partner of the OP executed the OP LPA for the purposes of creating a board of directors of the OP (the “Partnership Board”) and subdividing and reclassifying the outstanding OP Units into Class A, Class B and Class C OP Units. The OP LPA generally provides that the newly created Class A OP Units and Class B OP Units each have 50.0% of the voting power of the OP Units, including with respect to the election of directors to and removal of directors from the Partnership Board, and that the Class C OP Units have no voting power. The reclassification of the OP Units did not have a material effect on the economic interests of the holders of OP Units. In connection with the OP LPA, the OP Units held by the Company were reclassified into Class A OP Units, the OP Units held by NexPoint Diversified Real Estate Trust were reclassified into Class B OP Units and the remaining OP Units were reclassified into Class C OP Units.  

The Partnership Board of the OP has exclusive authority to select, remove and replace the general partner of the OP and no other authority. The Partnership Board may replace the general partner of the OP at any time. Pursuant to the terms of the OP LPA, the Company appointed Brian Mitts as the sole initial director of the Partnership Board. The number of directors on the Partnership Board is initially one but may be increased by following the affirmative vote or consent of the majority of the voting power of the OP Units (the “Requisite Approval”). The election of directors to and removal of directors from the Partnership Board also requires the Requisite Approval.

As of March 31, 2022, the Company owns 76.21% of the OP Units representing 100% of the Class A OP Units. See Note 11 for additional disclosures regarding redemption of OP Units.

The following table sets forth the redeemable noncontrolling interests in the OP (reflecting the OP’s consolidation of the Subsidiary OPs) for the three months ended March 31, 2022 (in thousands):

	For the Three Months Ended March 31,
	2022			2021
Redeemable noncontrolling interests in the OP, December 31,	$	261,423		$	275,670
Net income attributable to redeemable noncontrolling interests in the OP		4,943			15,829
Redemption of redeemable noncontrolling interests in the OP		(113,535	)		—
Distributions to redeemable noncontrolling interests in the OP		(3,569	)		(5,912	)
Redeemable noncontrolling interests in the OP, March 31,	$	149,262		$	285,587

The table below presents the common shares and OP Units outstanding held by the noncontrolling interests (“NCI”), as the OP Units and SubOP Units held by the Company are eliminated in consolidation:

Period End	Common Shares Outstanding		OP Units Held by NCI		Combined Outstanding
March 31, 2022		14,485,274		7,138,382		21,623,656

On July 20, 2020, in connection with the anticipated issuance by the Company of the Series A Preferred Stock, the OP GP, following the direction and approval of the Board, amended the partnership agreement of the OP to provide for the issuance of 8.50% Series A Cumulative Redeemable Preferred Units (liquidation preference $25.00 per unit) in our OP (the “Series A Preferred Units”). The Company contributed the net proceeds from the sale of the Series A Preferred Stock to the OP in exchange for the same number of Series A Preferred Units. The Series A Preferred Units have economic terms that are substantially the same as the terms of the Series A Preferred Stock. The Series A Preferred Units rank, as to distributions and upon liquidation, senior to OP Units. On March 31, 2021, in connection with the Company's ATM Program, the OP GP, following the direction and approval of the Board, further amended the partnership agreement of the OP to provide for the issuance of additional Series A Preferred Units.